Introduction To The Procurement Cycle
The procurement cycle seems relatively straightforward: need a product, find someone to supply the product, buy the product. Right? Not exactly.
The reality is, the procurement cycle is never as smooth as it appears to be. It’s a layered process that involves vetting suppliers, building long-term relationships, and optimizing spend to get the best possible ROI from your procurement.
But first, what is procurement? Procurement is a catch-all term that encompasses all the elements related to purchasing, from vendor selection and strategic vetting to contract negotiation and the purchase of goods and services. Procurement is the process of acquiring goods and services that are fundamental to successfully running a business.
Procurement is cyclical, meaning it follows a set process of steps from start to finish. The procurement process is typically made up of six steps, starting with the identification of a business need.
6 Steps to the procurement cycle
The procurement cycle, also known as the procurement process, is a series of events that lead up to the final purchase of goods and services. An efficient procurement process allows organizations to save time and money by minimizing delivery times, optimizing pricing, and building long-term relationships with reliable suppliers. Here are the x steps that make up the procurement process.
1. Identify the business need
The procurement process kicks off with a department or team within the business identifying the need for a particular material, product, or service from a third-party partner. This business need can either be for an internal purpose (e.g., office supplies for meetings) or for external purposes (e.g., shoelace material for sneakers the company will sell to consumers). In this phase, the company will identify the item, quantities needed, and budget available.
2. Create a list of suppliers
Next, the procurement team at the company will gather a list of potential suppliers who offer the goods or services needed. Sourcing suppliers is a little more involved than simply listing potential companies that can provide what you need. Integrating strategic procurement best practices in this phase of the procurement process can help you get the best possible list of suppliers from which to choose.
[Read more: Understanding the What, How and Why of Strategic Procurement]
Price shouldn’t be the only factor that qualifies a vendor for inclusion in your supplier list. When considering different vendors, vet suppliers for reputation, production capacity, communication, and quality. Do your market research — the cheapest option may ultimately end up costing you more in lost time and wasted resources.
Some companies go through a formal RFX process at this phase. This is a good way to gather the information you need to make an informed decision on who to work with.
3. Select a supplier + negotiate the contract terms
Once you’ve vetted and selected a supplier, it’s time to negotiate the terms of your agreement. This step in the procurement process is foundational to building long-term, mutually beneficial relationships with your suppliers. It’s also an opportunity to take advantage of additional payment term features, like dynamic discounting.
To make the most of your contract term negotiations, do your research. Look at past contracts to identify where you could streamline costs and save money, as well as to get a sense of a fair market rate. Consider other elements of the agreement beyond price, including the production or delivery schedule.
4. Create a purchase order
A purchase order is a formal contract used to finalize the buying of the good or service. The purchase order finalizes the contract negotiation and includes the total costs, description of the goods or services, quantities ordered, and the approval workflow. Usually, the purchasing company creates a purchase order to be circulated internally, approved by the senior leaders, and sent to the finance team.
Upon approval of the purchase order, the company’s finance team will send the details to the supplier with additional information:
- The reference number
- Payment terms
- Information regarding delivery and other details
The receipt of the purchase order triggers the supplier to prepare and send the goods and services per the agreement.
5. Receive the goods and services
The supplier prepares and sends the product or service to the company. Upon receipt of the order, the company should document that the order arrived as well as double-check that the order was fulfilled accurately. Create a record of the order and contact the supplier promptly if anything is missing or damaged.
6. Reconcile the paperwork + make a payment
Some suppliers require payment before releasing the goods: they will send an invoice upon receipt of the purchase order with a specific payment due date. Others will invoice on a regular schedule (quarterly, for instance). When an invoice arrives, the company must reconcile the paperwork and complete the transaction. This involves checking the purchase order, the invoice, and any receipts to verify that records are accurate and compliant.
This step also helps companies gain visibility into their cash flow. Companies can gain insight into when payments are being made and whether deliveries are being made on time. All of these records should be kept for future audits and to create a database of information used for spend analysis and optimization.
What is the final step in the procurement process?
Procurement doesn’t end with these six steps. In fact, when a procurement team isn’t actively managing this process for a particular product or service, they spend time finding ways to optimize procurement. This is where sourcing and procurement software can help.
Tools like Fairmarkit can help procurement teams gain insight into direct and indirect spend, automate approvals, build a database of trusted suppliers, and reduce the time spend sourcing critical business inputs. With an e-sourcing tool, procurement teams can do more than just move a product. They can uncover hidden savings, mitigate risks, and help the business grow profitably.
For more advice on optimizing the procurement process, check out Fairmarkit’s blog, The Source.